Paid Equity Research, Is it worth it?

In the past two months, few Blogs/websites – including the prominent S P Tulsian (www.premiuminvestments.in) are no longer available for free to the common public. We had been using them over a six month period and found them quite valuable. They analyzed typical mid cap and small cap stocks from an fundamental perspective with a long-term perspective. Without complicating the analysis, they came out with concise recommendations. No longer it is available now for free public use. This raises the query whether it is worthwhile for investors to pay for fundamental research.

Typically, Investors get detailed research reports from the following sources:

• Big brokerage houses like ICICIDirect, Motilal Oswal, and Kotak Securities offer free research when one signs up for their trading services.
• Brokers like India Infoline, HDFC securities offer some research for free to the pubic
• Blogs that offer third party research from a variety of sources. They have had content ownership issues, with research firms objecting (legitimately!!) to the usage of their research. The main challenge here is their unpredictability. The frequency is not predictable and the nature of research varies. Often the blog becomes unavailable after some time.

The other category is that of paid research. Again there are a couple of categories:

• Organized players like K R Choksey, Equitymaster offer paid research. The cost varies from Rs. 5000- 15,000 per year depending on the type of research (long-term, short-term calls, derivatives etc). The research universe is mainly for large-caps and mid-caps.
• Smaller players like S P Tulsian offer research, which covers small caps and ultra-small caps. The cost is again between Rs. 5,000-10,000 per year.

The question is whether is worthwhile going in for a paid research. It depends on the nature of the usage.

• If one is a serious player with a mid-cap, small-cap focus then following the specific content makes sense. Large cap research typically does not add significant value and it might be cost-effective to buy an index Exchange Traded Funds (ETF's).
• Market prices are liquidity driven in the short run. Market and company news again drives the price. Brokers have better access to this than retail investors and might provide topical research.
• For investors who add more than 4-5 lakhs per year to their portfolio, the cost of research (assume 10k) falls to 2%. This is the average mutual fund administration charge. For smaller portfolios, the cost of research is proportionately higher.

In summary, paid research is a worthwhile investment for research for serious investors with large portfolio. For others, there is enough "free" research to keep you informed and occupied.

OECD & IMF giving more information on sub-prime losses

Immediately a day after we wrote about the sub-prime crisis, two credible institutions have provided further information on the extent of sub-prime losses.

OECD (Organisation of Economic Cooperation and Development) works on behalf of 30 industrialized nations to study conditions in many areas of economic management and to advise on best practice, has stated the sub-prime crisis is not over. It was very critical of the supervision of the financial sector and has called the sub-prime crisis as "collective bankruptcy".

In the meantime, IMF (International Monetary Fund) has come out with a report that calculates that the total cost on account of sub-prime crisis would amount to USD945 billion for the financial sector. Click here to read the complete report.

We have seen write-downs only to the extent of USD300-350 billions so far. What is in store is another USD600 billion waiting to be written off in the coming quarters. It sounds scary, isnt?

Mounting sub-prime losses

You would have read about the sub-prime write-downs recently by UBS AG as part of their Q1, 2008 results. They have written down more than USD19 billion worth of sub-prime investments for the first quarter of 2008. Cumulatively they have written down USD37 billion over the last 2 quarters. However big the bank may be, it is very difficult to replenish capital to the extent of USD37 billion over the last 6 months.

The total write-offs by global banks and financial institutions in respect of sub-prime investments has already crossed USD300 billion. Several other banks would be declaring their first quarter results in the next couple of weeks and one can expect loads of further write-downs.


What is in store for the future?

1. Many of the global institutions have raised fresh capital to meet these losses. However, the new capital will be required to replenish the losses, and will not result in fresh liquidity getting released in the financial markets.

2. These big banks and investment banks are big lenders to the hedge funds and other prime broking clients. There is a possibility that their credit lines may be cut forcing hedge funds to square off positions in equities/commodities markets to repay the loans.

The most scary part is the lack of clarity on the magnitude of these losses. Even now, estimates by Lehman Brothers and Goldman Sachs range from 400 billion to a trillion dollars. Hence, it is prudent to exercise caution here and one can safely assume that banks will have to make further provisions in 2008.

Inflation and the after effects!

We have seen inflation in India going up steadily, driven by higher commodity prices. The last reported inflation is above 7.00% for the week ending April 1, compared to 2.97% in Oct 2007. That is, there is a clear increase of 4 percentage points in inflation over the last 7 months.

In response, the Indian government has freed imports of essential commodities and cut the import duty for several items. The wide-spread expectation is that RBI will hike the Cash Reserve Ratio. This will increase the cost of funds in India with an adverse impact on interest rate sectors like automobile, real-estate and above all banking.

On the other hand, US Fed is fighting real hard to delay the recession, if you believe it is not yet already there. The FED has been aggressively cutting the rates and currently it is at 2.25 %. It is believed that there would be further cuts which would force flight of capital from US to other markets with higher interest rates. If you see the interest rates raising in India, there is a possibility of capital flowing into Indian debt. Of course, there is a exchange rate risk but can't be very adverse if there is more flow of dollars into India. Rupee is going to appreciate against the dollar.

So to summarize the effects of inflation:

1. Interest rates are going to be high in India for at least the next 6-12 months.

2. Inflation is going to be high and leading to higher commodity prices.

3. Debt instruments and markets are going to be favoured compared to equity markets.

4. Rupee may appreciate further and touch Rs38 to a USD in the next 12 months.

5. Equity markets would be subdued and more stock specific.

Health Insurance and Mediclaim – what are the differences?

There has been a slew of Health Insurance products launched by life-insurance companies over the last few months. LIC's Health Plus, ICICI's Hospital Care, Reliance Life's Health N Wealth and Max New York Life's Medicash are some of the health insurance products launched recently.
Before the launch of these health insurance products, there was only one health insurance product in the market called "Medi-claim" issued by the PSU non-life insurance companies like National Insurance, New India Assurance.
With the availability of both "health insurance" covers from Life Insurance companies and the "Mediclaim" from the non-life insurance companies, there is a possibility that we all tend to believe that both the products are one and the same. It is not the case.

This article is to provide more clarity on the differences between these products and help the customer choose the most appropriate one.

Essentially, the differences between "Health Insurance" (Life Insurance companies products) and the "Mediclaim" (non-life insurance companies products) are as follows:
1. Mediclaim policies issued by non-life insurance companies would compensate only for the expense actually incurred, whereas life-insurance companies would give you the lump-sum amount specified in the policy irrespective of your actual spend. However, the ceiling in respect of life-insurance companies' products should be kept in mind.
2. Non-life insurance policies are one-year policies, similar to your vehicle insurance, whereas life-insurance companies' schemes are long term policies. Mediclaim policies needs to be renewed on a yearly basis and it is a possibility that the insurer may not accept renewal due to adverse health condition or claim history.
3. Non-life insurance companies schemes have no provision for daily cash expenses as offered by the life-insurance companies schemes.
4. Non-life schemes cover most forms of hospitalisation, whereas lump sum benefit under the life insurance companies schemes are normally meant only for a specified list of diseases/surgeries. In case of LIC 's Health Plus, it covers a set of 50 dreaded diseases or surgeries. Outside these 50 diseases/surgeries, if somebody gets admitted for hospitalisation, LIC would be liable to cover the medical expenses . They will pay you only the Hospitalisation cash benefits.
5. Life-insurance companies schemes comes bundled with investment options (unit linked plans) whereas non-life insurance would never have investment options. The investment risk in unit linked products are to be borne by the buyer of the health insurance, as in any other ULIP product.

Which one to opt for?
The ideal solution is to have both the "Mediclaim" and "Health Insurance" policies. Since the Health Insurance policies provide for a lump sum payment if an insured is diagonised or treated for any of the listed diseases, it would act as an effective supplement to the mediclaim policy.

Term Insurance premiums to cost less!!

IRDA has come out with a circular on 24 March 2008 reducing the solvency margin on pure risk insurance policies, popularly known as term insurance. The pure term insurance policies would attract lower solvency margin now. Solvency margin is similar to the capital adequacy ratio which are being maintained by banks.

The additional capital freed up by the reduction in solvency margin should help insurance companies to price the pure risk cover cheaper and take it to the various segments of the public.

We expect that the term insurance policies would become cheaper in the months to come. The insurance companies may take a month to implement the new lower premiums due to operational constraints. Good news for the public as well as for the insurance companies!!

Most important lesson from Bear Stearns fiasco - Asset Diversification

Bear Stearns is history now! It has been taken over by JP Morgan Chase for $235 million in a stock swap deal whereby, each individual share of Bear Stearns is valued at $2.00 (USD Two!!) The stock of Bear Stearns have plummeted in value from $160 in March 2007 to $2 in March 2008. The fall is tremendous and it is well beyond the imagination of all.

Most important issue part of the whole episode is how staff members of Bear Stearns have been terribly impacted by the takeover of JP Morgan Chase. Bear Stearns employs 14,000 people across the globe and the staff own more than 30% of the stock of the company. The worst affected lot seems to be them who have lost all their wealth due to this merger.

This throws up an interesting as well an very important point: asset diversification. However confident you are about your company, it is prudent to en-cash part of your share holding in your own company and move it to assets outside your business/industry/sector to provide downside protection. We need to accept the fact that the success or failure of a company are outside the scope, influence and control of ordinary employees, and it is for their good sake they diversify their assets rather than just holding on their employers shares. We have covered the need for asset diversification in our post "Prudential Financial Management". Click here to read the article.

Who in this world would have thought that Bear Stearns would go down in March 2007 when it was quoting at $160? The net worth of the company's Chairman fell from over $1 Billion to just over $12 million in exactly 12 months time.

We have at least 50 companies in India which has provided shares to their employees and made them millionaires over the last 10 years, like Infosys, Wipro, CTS etc. We strongly advise these employee millionaires to convert part of their holdings in their employer company in a orderly and timely manner to diversify into other income generating/capital appreciating assets to avoid a la Bear Stearns!!